In his rant, Paul argued that inflation was actually more like 9 percent—and not the 2.9 percent increase that Bureau of Labor Statistics says we've seen in the last 12 months—based on the old CPI statistics.

Williams's research contends that the 12-month inflation statistic we should have seen last month was 10.5 percent, arguing that the basis for calculating CPI back in 1980 was the pure formula before "the reporting system increasingly succumbed to pressures from miscreant politicians, who were and are intent upon stealing income from social security recipients, without ever taking the issue of reduced entitlement payments before the public or Congress for approval."

(Williams also contests other government economic indicators, like M3 money supply, one of the keys supporting Ron Paul's argument that expansion of the money supply produces an almost 1-to-1 increase in inflation.)

From the BLS (.pdf), these are the three main pieces of their CPI calculations that regularly come under attack from Williams and his ilk:

Beginning in 1983, the BLS changed the way it saw homeownership from reflecting the price of the asset to reflecting its rental equivalence.

Beginning in 1998, the BLS expanded the list of consumer goods on which it performs hedonic regressions to include computers, televisions, and refrigerators. Such regressions attempt to control for changes in the quality of goods.

In January 1999, the BLS changed the way it calculated indexes to reflect consumers ability to switch to, say, cheaper apples sold in the same market when other apples became more expensive. That's a change from the Laspeyres index used to calculate CPI before then.

The main issue

Critics of the BLS take the biggest issue with the final item here. We'll synopsize briefly an illustration of the Bureau gives as to why it made this change:

You generally buy four candy bars—two peanut and two chocolate bars—at $1 a piece. The price of the peanut bars goes to $4. So in order to buy exactly the same goods, you'd have to spend $10. So the Laspeyres formula would say that the price of your basket of candy goods increased from $4 to $10.

The BLS argues that because consumers maximize their utility with respect to prices, they shift away from more expensive goods when very similar goods are cheaper—and they wanted to account for this in their measurements. So maybe paying $7 for one peanut bar and three chocolate bars gives you the same utility as your initial purchase. Thus, saying that $10 is your new price of goods would be an "overstatement" of what's actually happening—they're not arguing that your utility is exactly the same for $4, they're arguing that $7 is a much more realistic evaluation.

Taken at face value, the problem is readily apparent—it would appear that the BLS wants you to scrimp on steak, eat more hamburger, and deal with it. See Williams's argument:

...it is the so-called "overstatement" in the cost of living that enables the maintenance of a constant standard of living, where the consumer does not have to be concerned with changes in price. The BLS claims that with the geometric weighting, weighting shifts are measuring a "constant level of satisfaction," that there is no "declining standard of living" in the numbers, because geometric weighting is not applied to broad enough categories to allow hamburger substitution for steak.

While this argument may appear to be persuasive, it ignores one simple fact: the consumer price index is meant to measure the effect prices have on a consumer's utility, not what they can actually buy. Paying $7 gets you more utility than paying $10 (because you have $3 more dollars left over), so obviously you're going to adjust your purchasing accordingly.

To give an even more real-world example, if I'm having people over for dinner, I'm going to hem and haw over buying yellow bell peppers because on one hand it makes my stir-fry look more appetizing, but on the other hand buying the same number of green bell peppers puts another $1 in my pocket. Since both choices provide me equal utility, it only makes sense for the BLS to evaluate them equally.

Now, considering that the price of yellow peppers ($3) is always higher than the price of green ($2), if the price of the yellow peppers were to rise ($4), then the BLS would account for the fact that more consumers are going to switch to green peppers as an alternative to yellow peppers because they'd rather have the utility of extra cash in their pockets. Thus, there will be a jump in the price basket, but it's mitigated by the fact that consumers are retaining some utility out of saving the money.

If the inflation rate measures the change in the purchasing power of your dollar, then CPI is clearly meant to assess the amount of money you would need to produce the same amount of utility, not purchase the exact same goods. Thus Williams's point—while seductive—just doesn't add up.